How does principal repayment affect the financial statements?

CFA Level I
#1

Hello everyone and thank you in advance,

I was wondering how the principal repayment of debt affects the 3 main financial statements (specifically regarding the income statement…that is, if it even does).

I am pretty sure that on the balance sheet, bonds payable will be reduced by the carrying amount at maturity and cash should as well decline (I think by the same amount). Regarding the cash flow statement, the payment is recorded as an outflow from financing.

But…is there anything that is recorded on the income statement? Is it an operating expense?

Thank you!

#2

It doesn’t affect the income statement directly. It affects the income statement indirectly because once you repay the principle your interest payment declines.

It reduces cash and liabilities on the balance sheet.

It reduces CFF on the statement of cash flows.

#3

You should also add the effects of bond amortizaion of premiums and discounts.

#4

Hi,

On which statement this effect would be considered?

#5

Bond amoratization is reflected in the income statement and balance sheet, but not the cash flow.

See long-term liabilities in your FRA book.

#6

Thanks I got it

So carrying value will be reflected on balance sheet.

and interest expense in income statement.

and interest exp in CFO

and when we will calculate CFO from net income then we will add back amortized component of interest expense in CFO.

Thanks

#7

Correct.

Note that the CFO amount will be interest paid, which will be interest expense less any amortization of premium/discount.

#8

Hi Magician,

Thanks for correcting me.

#9

Just making sure nobody makes mistakes.